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Home Loan Guide for First Time Home Buyers in India

Home Loan Guide

Last Updated 24th Jan 2022

  • Home loan is generally taken either to buy a flat/house, construction of house or renovation.
  • Your home loan eligibility generally depends on repayment capacity and property price.
  • One important guide to home loan eligibility is that you should have a stable source of income and your EMI should be 40%-45% of your salary or income.
  • Home loans are usually sanctioned for a maximum long tenure of 30 years.
  • It is observed that the average period people take to pay off their home mortgage fully is around 8 years.
  • As per RBI circulars, banks are not allowed to charge prepayment penalty or charges on floating rate home loans.
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Guide For Home Loan

Taking a home loan is the only way a person in his 30’s or early 40’s can afford his family a home. It also means that you commit to paying almost EMI of as much as up to 40-45% of your monthly income for up to 30 years. Hence, it is important that you make the right decision that doesn’t hurt you in future. This guide is targeted at helping you understand home loans better and draws upon the long experience of the MyLoanCare team in helping people with their loan requirements.

Step 1. Estimate Home Loan EMI, Check Home Loan Eligibility, Decide Loan Amount and Tenure

Do not opt for the longest loan tenure in order to maximize loan amount eligibility and minimize EMI. Understand the cost which you will have to incur when you take home loan. On a ₹ 40 Lakh loan at 6.50% for 15 years, the EMI is ₹ 34,844 and the total interest you pay to the bank over 15 years comes to ₹ 22,71,972. For a 15 year loan, for the same loan amount and at same interest rate, the EMI is 14% lower at ₹ 29,823, whereas over 20 years, you pay ₹ 31,57,503 as interest, which is ₹ ₹ 39% higher than on a 15 year loan.

Keep a check on the following points to strike the right balance:

  • How much EMI you can comfortably pay every month?– this should not exceed 60-65% of your net post tax pay.
  • Calculate your loan eligibility for various loan tenures based on this EMI and your age. Opt for the shortest loan tenure that meets your loan requirement. Also inform the bank about your other fixed income such as rent and interest to increase eligibility. If you need more loan amount then you may add up to 3 co-applicants who are earning family members.
  • Note that the loan amount cannot exceed 75 – 80% of the cost or market value of the home . So, make arrangements for the balance amount (also called margin money).

Step 2. Check Approval Status of your Property

For Builder Projects and Resale Properties, check the following:

  • The property should be registered in the name of the seller. The entire chain from first conveyance of the property upto the last sale should be available.
  • For self constructed property, an approved map plan should be available.
  • Some banks will fund upto 150% of the registry amount subject to 75% of market value. Whereas some restrict to 75% of agreement value and 75% of market value, whichever is lower.
  • Banks don’t fund properties in gram panchayat areas or those built without approved building plans.

Step 3. Home Loan Fixed Rate or Floating Rate – Choose your Option

At MyLoanCare, in the current market scenario, we recommend floating rate loans over fixed rate ones. This is mainly because we expect rates to trend down over coming months. Secondly, floating rate loans come with nil prepayment charges unlike fixed rate loans.

Fixed rate loans can be an option for you if your monthly cash flows (after paying off EMIs and other expenses) cannot take any additional burden. Fixed Rate loans, however, come with a higher rate of interest than floating rate loans. Also carry a prepayment penalty charge.

Another catch with fixed rate loans is "How fixed is the so-called fixed rate?" A fixed rate is seldom fully fixed. Most banks offer fixed rate for the initial period and convert this into floating rate thereafter. Always check what will be the applicable rate after the fixed rate period ends. Most often the floating rate leads to increase in interest rate when converted from fixed. This is particularly true for fixed rate loans from LIC Housing Finance.

Step 4. Check Home Loan Prepayment and Foreclosure Charges

It is important to select a bank that allows you to prepay your loan without any charges or hassles. As per RBI circulars, banks are not allowed to charge prepayment penalty or charges on floating rate home loans. However, banks may charge penalty on prepayment of fixed rate loans. Charges may vary from 1% to upto 3% of the loan amount. So, check this aspect carefully before selecting a bank and home loan. Another option is a smart loan or an interest saver loan. You may like to consider Home Credit or Home Saver or Maxgain options which allow you to deposit your surplus savings in a bank account. Pay interest on a home loan only on the net difference between the two. So, for the period that your surplus cash stays in the bank, you pay less interest on your home loan.

Step 5: Select Best Bank for Home Loan

While interest rate is important thing to be considered while taking a home, here are the few other things which one should consider:-

  • Turnaround time and customer service levels: Read the customer ratings and reviews of banks by customers who have availed loans in the recent past. Their experience may help you make a better choice and avoid common mistakes. Check which banks will offer you doorstep service and for which ones would you need to visit the bank branch.
  • Check the past base rate trend of the banks you are considering. This can tell you if the banks changes rates too often. Check if the bank passes on the benefit of lower policy rates to its old customers or not. Click here for current base rates of banks in India.
  • Compare offers and choose the one that’s best and not necessarily the cheapest. Compare offers on interest rates, processing fees, customer ratings, servicing and all-in-cost.
  • While home loans are sanctioned for a tenure of upto 30 years, rarely do people actually run the loan for that long. Each one of us wants to pay off the loan at the earliest and own our home fully. It is observed that the average period people take to pay off their home mortgage fully is around 8 years. This happens because most people make partial or even full prepayment of the loan when they have surplus money

Things That Affect Your Home Loan Approval

Following are the factors which can affect the home loan approval or can lead home loan rejection:-

Age

Some lenders do not approve loans if you are closer to your retirement. The logic behind this bank feels that repayment can be difficult for such people to repay the loan on time. The younger you are the easier it is, you can easily get a loan for longer tenure.

Monthly Income

A steady source of income (especially those who are salaried or self employed) can get a home loan easily. This reduces lenders questions on your capability to repay the loan within the tenure. Also, frequent job changes can have a negative impact.

Age of Property

Age of a property is a major factor which is considered. If the property is too old then the lender might reject the loan.

Credit Score

Having a low credit score can have a negative impact and can get loan applications rejected. Whereas, higher credit score means higher loan amount and longer tenure.

How MyLoanCare Helps to Apply for a First-Time Home Loan?

If you are a first time home loan buyer then MyLoanCare will help you get:

  • Best offers from partner banks. Currently you can avail loan from Citibank at 6.50%.
  • You can easily compare interest rate, EMI per lakh, tenure.
  • Also, hassle-free first time home buyer down payment.
  • You can decide which home loan scheme is best according to your needs.
  • We will help in preparing all your documents.

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FAQs

Is the security required for a home loan?

A home loan is a secured loan that requires the borrower to keep collateral with the lender. However, the collateral in case of the home loan is the home itself for which the loan is borrowed. In case a person fails to repay the home loan on time, the lender has the right to acquire the property.

How can I clear my home loan fast?

You can clear your home loan fast by paying the repayment amount either partially or fully, through home loan prepayment or foreclosure. Paying off the amount will not help you get rid of your home loan fast, but would also lower the home loan burden, as the principal amount is reduced. However, before going for the prepayment and foreclosure, it is better to know the foreclosure or prepayment charges that the lender charges in advance.

Who can be a guarantor for a home loan in India?

A guarantor should be an individual above the age of 18 years with a good financial history and a stable source of income. Apart, he or she should be sure about the credibility of the loan applicant.

What is the easiest bank to get a home loan from?

You can get a home loan easily nowadays, through the online loan portal of the bank. The online home loan application process is easy, quick, reliable and convenient.

How to get a first time home loan?

For a new home loan buyer they should check the eligibility, compare interest rates, tenure, loan amount. Here is a guide to home loan eligibility. Also, you can apply for a home loan with us or you can visit the nearest bank branch with whom you want to avail loan.

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*Terms and conditions apply. Credit at sole discretion of lender, which is subject to credit appraisal, eligibility check, rates, charges and terms. Information displayed is indicative and collected from public sources. Read More
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